All eyes on Fed as policy meeting looms
MARKETS are already very jumpy over the oil-price crash, and this week, another element of uncertainty may enter the mix.
Will the United States Federal Reserve adjust its stance on the timing of its looming interest-rate hike when it holds its December meeting tomorrow and on Wednesday?
The answer will be decisive in terms of how markets fare as the year winds down.
Some are speculating that at its final two-day policy meeting this year, the Federal Open Market Committee (FOMC) may change its longstanding formulation of saying it will keep interest rates at near zero for a "considerable time", given a recent string of positive US economic data.
But some economists believe the Fed will probably exercise caution in this regard to prevent worsening market jitters.
"Whether that language is changed, we expect chair Janet Yellen to signal a patient and gradual evolution of policy in a data-dependent context in her post-meeting press conference," Michael Hanson, an economist at Bank of America Merrill Lynch, said in his FOMC preview note. "The Fed likely wants to gradually guide the markets towards lift-off, not shock them."
Regardless of the meeting's outcome, it will have at least some ripple effect on the benchmark Straits Times Index (STI) this week, IG Markets strategist Ryan Huang told The Straits Times.
"We might see some investors holding back ahead of the FOMC event, so it could be a bit of subdued trading before more volatility heading into the event later in the week. Oil and gas stocks are likely to cap any gains on the STI," he said.
Energy plays on the local bourse suffered their hardest hit in recent years, as Brent crude oil prices dropped nearly 11 per cent last week.
As a result, Ezion Holdings dropped by 8.2 per cent to $1.06 to hit its lowest level since December 2012.
Sembcorp Marine ended the five days with a dip to $2.89 while Keppel Corp closed at $8.10 - both at their lowest level since the market crash in September 2011.
Back in the US, ExxonMobil and Chevron similarly hit their 52-week low last week. The struggling oil stocks led Wall Street to a 3.8 per cent fall - its worst week since September 2011.
With oil prices unlikely to see any firm rebound after Saudi Arabia refused to cut production, the key for investors is to seek a haven in more secure plays, analysts advised.
Banking is worth looking at, given that earnings are likely to keep growing even if regional economic growth turns out to be modest, Credit Suisse said in its market-outlook report last week.
Credit Suisse analyst Anand Swaminathan named DBS the sector's top pick: "It clearly has the most potential for positive earnings surprise driven by better net interest margins and loan growth. The key risk remains volatile capital markets, but DBS' non-interest income is now much more broad-based and resilient."
Meanwhile, investors tempted by dropping oil prices to pick up aviation plays should beware, said OCBC Investment Research.
The much lower oil prices are sharply lowering their main cost - airline fuel. Said OCBC: "We are of the view that the aviation sector will continue to face headwinds from overcapacity in South-east Asia, putting downward pressure on yields next year...We think the depressed yields will outweigh the resulting pick-up in air-travel demand."